The predictive power of Bitcoin prices for the realized volatility of US stock sector returns

This paper is motivated by Bitcoin’s rapid ascension into mainstream finance and recent evidence of a strong relationship between Bitcoin and US stock markets. It is also motivated by a lack of empirical studies on whether Bitcoin prices contain useful information for the volatility of US stock retu...

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Bibliographic Details
Published in:Financial innovation (Heidelberg) 2023-01, Vol.9 (1), p.62-62, Article 62
Main Authors: Bouri, Elie, Salisu, Afees A., Gupta, Rangan
Format: Article
Language:English
Subjects:
Bitcoin prices
Digital currencies
Economic gains
Economic growth
Economics
Economics and Finance
International finance
Investments
Macroeconomics
Macroeconomics/Monetary Economics//Financial Economics
Political Economy/Economic Systems
Realized volatility prediction
S&P 500 index
Securities markets
Stock exchanges
Stock market indexes
US sectoral indices
Volatility
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Summary:This paper is motivated by Bitcoin’s rapid ascension into mainstream finance and recent evidence of a strong relationship between Bitcoin and US stock markets. It is also motivated by a lack of empirical studies on whether Bitcoin prices contain useful information for the volatility of US stock returns, particularly at the sectoral level of data. We specifically assess Bitcoin prices’ ability to predict the volatility of US composite and sectoral stock indices using both in-sample and out-of-sample analyses over multiple forecast horizons, based on daily data from November 22, 2017, to December, 30, 2021. The findings show that Bitcoin prices have significant predictive power for US stock volatility, with an inverse relationship between Bitcoin prices and stock sector volatility. Regardless of the stock sectors or number of forecast horizons, the model that includes Bitcoin prices consistently outperforms the benchmark historical average model. These findings are independent of the volatility measure used. Using Bitcoin prices as a predictor yields higher economic gains. These findings emphasize the importance and utility of tracking Bitcoin prices when forecasting the volatility of US stock sectors, which is important for practitioners and policymakers.
ISSN:2199-4730
2199-4730
DOI:10.1186/s40854-023-00464-8